Global Development: Views from the Center
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June 21, 2006
Is Microcredit Obsolete?
Posted by David Roodman at 06:18 PM
Several approaches to microfinance have been refined over the years, some lending to groups (as at the Grameen Bank), some to individuals (increasingly prevalent in Latin America). All seek to solve a business problem: how do you deliver small-scale financial services to the poor, in countries with weak infrastructure and human capital, while minimizing administrative costs? The various approaches to microcredit are what economists would call technologies: clever ways of producing a service that was once thought impossible, or at least impossibly expensive. But in lay person’s terms, they are low-tech, built around passing around bits of wrinkled paper we call cash and, often, recording each transaction on several pieces of paper. Recent advances in electronics and communications may be creating vast new possibilities for delivering financial services to poor people. They might even make today’s cash-based microfinance “technologies” look archaic. Last week, CGD hosted a seminar on this theme.
David Schwarzbach, Vice President for Business Development at Net1 UEPS Technologies described his company's smart card-based system, which the South African government uses to deliver welfare monthly payments to 3.6 million people. Each card contains a computer chip, a digital record of the owner’s fingerprints, and storage for encrypted data. Unlike in a traditional banking system, where central mainframe computers hold all the client data and do all the processing, the Net1 system is distributed and usually offline. The cards hold the data and can, for example, offer loans on the fly, since they hold data on the owner’s payment history and welfare check stream. The cards can also be used for shopping, paying bus fares, managing medical records of AIDS patients, and tracking whether children enrolled in a government program meant to boost school enrollment are actually attending school. However, the cards currently are designed to work mainly with proprietary card readers that Schwarzbach says cost “under $1,000.”
Gautam Ivatury, manager of the Microfinance Technology Program of Consultative Group to Assist the Poor (CGAP), which is a donor-funded body housed at the World Bank and focusing on microfinance, put the Net1 technology in perspective. Many companies are developing such technologies, some based on cards, some on cell phones. Personally, I find the phone-based technologies particularly intriguing. (Schwarzbach says Net1 is developing a phone-based system. Download his presentation slides) Ivatury reported 2.3 billion earthlings now tote phones. And the number is growing fast, even in the poorest countries such as the Democratic Republic of Congo. Put otherwise, there are now 2.3 billion people carrying around networked computers. What could people do with those besides talk? Financial services seem like a leading candidate. In his presentation (large file 3MB), Ivatury described high-tech examples from Brazil, the Philippines, and South Africa, some using phones, some not.
It is far too soon to know how well these technologies will solve the microfinance business problem and reach the truly poor. But the potential for radical cost reduction and diverse new services is striking. Compared to traditional microcredit, it’s almost like being on a different planet.
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Comments
These are great examples of the ways that microfinance products are being delivered to clients. In addition, there are also technology developments on the funding side of the equation. Rather than relying on philanthropic donors to MFIs or large institutional investors, there is a new way for individuals to participate in funding microfinance. Kiva.org is the first web platform for peer-to-peer lending direct from individuals to micro-entrepreneurs. This is a diversified funding source for MFIs. Also the lenders actually get the money back rather than just making a philanthropic donation. The site, Kiva.org, has a lot more info, but it is on target with technology improvements in the microfinance sector.
Posted by: Val at June 26, 2006 02:00 AM
David,
You are right that the business model presented at the seminar is one driven by client demands for financial services. It is a wildly different world from the plain vanilla - one size fits all world of microcredit which has been the product coming out of many supply-driven credit NGOs. Increasingly, the latter are being dragged into a market environment where they will have to develop financially sustainable business models. This will involve not only demand-driven financial product design and delivery systems, but also having to increasingly mobilize financial resources on a commercial basis in domestic and external capital markets.
Posted by: Del Fitchett at June 27, 2006 02:56 PM
I think the best and fastest way to put microfinance on a serious basis, multiplying the number of loans and thenumer of microentrepreneurs is to reinvigorate the idea of a Tobin Tax. An estimated 1.5 TRILLION DOLLARS A DAY is subject to cross-border currency transactions. At a tiny perecntage -- a fraction of a penny on $100 would yield a fund of4300 billionm a year. Either this fund could wipe out all the debts of impoverished peolle world wide in a minute..or if that's too severe, the World Bank could keep the money and use it as a gurantor of last resort for big multinational banks, who could lend it via local retail banks in poor countries. The fund would be so much bigger than needed to guarantee loans that there would be enough to subsidize microloans and offer them at standard loww rates of, say 5 or 6 percent, to microentrepreneurs...and still enough to use in support training of local retail loan officers. The U.S. government and the big banks are against a Tobin Tax, as you would expect, but in time they woulrd come aroun -- just as doctors came aroud to Medicare, and General Motors is now seeing merit in a universal health coverage.
Posted by: Eamon Brennan at June 29, 2006 03:28 PM
The ideas presented here are very intriguing, but I think they're well ahead of reality. There are a couple of fundamental problems with the systems here, primarily the access to information and access to technology. These may not be as relevant for educated entrepreneurs in some societies, but are binding for poorer people served by many contemporary microfinance organisations.
Posted by: Vivek Prakash at July 6, 2006 06:53 AM